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Income Tax Appellate Tribunal, AHMEDABAD “A” BENCH AHMEDABAD
PER S. S. GODARA, JUDICIAL MEMBER
The assessee and Revenue have filed instant cross appeals for assessment year 2009-10 arise against the CIT(A)-VI, Ahmedabad’s order dated 18.06.2014 in case no. CIT(A)-VI/Addl.R-1/295/11-12, in proceedings u/s. 143(3) of the Income Tax Act, 1961; in short “the Act”.
ITA Nos. 2196 & 2395/Ahd/14 [Axis Bank Ltd. vs. ACIT] A.Y. 2009-10 - 2 -
Heard both sides. Case file perused.
The assessee’s first substantive ground in its appeal ITA No.2196/Ahd/2014 seeks to reverse both the lower authorities’ action disallowing a sum of Rs.39,45,30,140/- u/s. 14A r.w. Rule 8D of the Income Tax Rules relating to its exempt income of Rs.15,48,10,925/-. The assessee is a company engaged in banking business. There is no dispute that it derived the above exempt income in the relevant previous year. The assessee appears to have suo motto disallowed a sum of Rs.1,00,21,247/- during the course of scrutiny. It thereafter contested Assessing Officer’s show cause notice seeking to invoke Section 14A r.w. Rule 8D inter alia by pleading that there has to be an express satisfaction u/s.14A(2) qua its accounts establishing a direct nexus with the exempt income in question, its interest free funds were much more than tax free investments and that the relevant facts involved in deriving the impugned exempt income did not warrant any such disallowance. The Assessing Officer however rejected all these contentions in his assessment order. He observed first of all that the assessee has not discharged its initial onus of proving the above direct nexus between tax free investments vis-à- vis the non interest bearing funds. He then invoked proportionate interest and administrative disallowance under Rule 8D (2) (ii & iii) to the tune of Rs.37,11,56,870/- and Rs.3,33,94,517/-; respectively totaling to Rs.40,45,51,387/- as reduced by the above suo motu disallowance of Rs.1,00,21,247/-; coming to Rs.39,45,30,140/- under challenge being made in assessment order dated 21.12.2011.
The CIT(A) affirms Assessing Officer’s action by placing reliance upon his corresponding findings in preceding assessment year 2008-09 as under:
“4.4 Identical issue came up in appellant's own case for A.Y. 2008-09. Vide order dtd. 01-12-2011 in appeal no. CIT(A)/Addl.CIT./R-l/247/10-ll, my predecessor held as under: “4.3 I have considered the facts of the case; assessment order and. appellant's written submission. Assessing officer made disallowance of expense relating to exempt income. Such disallowance was considered necessary since appellant disallowed only Rs 0.64 crores out of common interest and other expenses treating the same as relating to
ITA Nos. 2196 & 2395/Ahd/14 [Axis Bank Ltd. vs. ACIT] A.Y. 2009-10 - 3 -
investment resulting in exempt income. The satisfaction of the assessing officer in this regard is as under-
" the amount proposed for disallowance under section 14 A of the Act by the assessee at Rs. 63,84,525/-, (which was also withdrawn during the assessment proceedings is found to be extremely low, considering that the assessee has earned exempt income of Rs. 30,19,15,390/-. No sound basis is found for this disallowance. Not being satisfied by this claim of the assessee, the undersigned is bound to revert to Rule 8D of the Rules."
Now rule 8D is held to be applicable with effect from assessment year 2008-39 by Bombay High Court, the disallowance of expenses relating to exempt income are to be made by the method prescribed in the said rule if disallowance of expenses relating to exempt income is not made by the appellant properly. Appellant only disallowed nominal expenses under section 14A whereas if was Incurring substantial expenses on account of interest and other administrative expenses for the business of banking and investment, part of which resulted in exempt income. Considering all these facts, disallowance under section 14 A on account of interest and other-expenses are necessary. In the case of appellant, business is of borrowing and lending and therefore it cannot be said that borrowed funds were for X purposes and not for Y purposes. Entire funds in the case of bank are fungible and no part of fund can be attributed exclusively to investment or other banking activity. Therefore argument of owned fund or interest free funds utilized for investment is not correct. There is no question of beneficial allocation of funds in the case of banking business. Therefore the decisions referred by the appellant in this regard are not applicable to the banking company whose principal business is of borrowing and lending/investments. Coming to the method of computation of disallowance under section 14 A, assessing officer disallowed expenses relatable to exempt income as per rule 3D which is mandatory from assessment year 2008-09. For interest, proportionate expense is disallowable whereas for other expenses .5% of average investment value is disallowable. Considering the fact that appellant claimed huge administrative and other expenses, the disallowance of administrative expenses made by the assessing officer @.5% of investment resulting in exempt income is as per the formula given in rule 3D which is mandatory for making disallowance. In view of this the addition @ .5% of investment resulting in exempt income made by the assessing officer is confirmed. Since rule 8D is mandatory from this year, disallowance of administrative and other expenses relating to exempt income are to be computed as per this. The basis of disallowance in earlier years cannot be applied this year since rule 8D is mandatory and has to be applied for this year onwards. Accordingly the orders of appeal in earlier years are not relevant for this year.
As regards interest, appellant had borrowed funds on which interest was paid. While making investments, both borrowed funds as well as own funds were used hence one cannot say that borrowed funds were used only for business purpose and owned capital was only used for investment. Admittedly no separate accounts are maintained for business and investment activities therefore appellant's claim is not justified that borrowed funds were not used in making investment. Therefore in the absence of clear cut details of utilization of funds, the formula given in rule 8D which is mandatory from this year onward is to be applied. As regards trading shares, the decisions relied upon by the appellant are not applicable in view of the fact that dividend receivable on even trading stock is exempt and disallowance of expenses relating to that are to be made. Once Rule 8D is applied in computing disallowance, there is no scope for modifying the figures so computed. Since rule 8D was not applicable till last year, the disallowance under section 14 A confirmed was not exactly as per rule 8D. However since the formula for
ITA Nos. 2196 & 2395/Ahd/14 [Axis Bank Ltd. vs. ACIT] A.Y. 2009-10 - 4 -
disallowance of common interest is given in rule 8D, there is no scope of any variation on account of any claim. The moment appellant is not able to prove that interest or part of interest paid is not directly attributable to taxable income received or earned; the formula has to be applied. Since rule 8D is statutory and binding, the disallowance computed under the same rule has to be made. Accordingly, appeal orders passed for earlier years are not considered relevant in the present situation. The disallowance of interest made by the assessing officer is accordingly confirmed." Facts remaining the same in the year under consideration, following the above-mentioned order, impugned disallowance u/s 14A of Rs. 39,45,30,140/- is upheld. This ground of appeal is dismissed.”
We have heard rival submissions. Both parties are fair enough during the course of hearing that relevant facts pertaining to the instant issue are identical as they were in preceding assessment year 2008-09 i.e. since application of Rule 8D of the Income Tax Rules. The assessee then takes us to paper book pages 77 to 98 containing a co-ordinate bench order dated 24.01.2017 for preceding assessment year deleting proportionate interest disallowance on the ground that assessee’s interest free funds exceed its tax free investments amounting to Rs.651crores. It then confirms latter limb of administrative disallowance amounting to Rs.63.84lacs. We take cue therefrom to notice that assessee’s tax free investments in the impugned assessment year read a figure of Rs.684crores as against interest free funds in the nature of share capital and reserves amounting to Rs.10,214crores. We therefore find no reason to concur with the above proportionate interest disallowance of Rs.37,11,56,870/-. We now proceed to deal with administrative expenditure disallowance of Rs.3,33,94,517/-. It is no more an issue that the above co-ordinate bench had upheld the same in preceding assessment year. We therefore adopt consistency to affirm this latter disallowance of administrative expenditure. This first substantive ground is taken as partly accepted.
The assessee’s second substantive ground pleads that both the lower authorities have erred in law as well as on facts in adding speculative gains of Rs.2,64,27,796/- amortized as per RBI guidelines as well as in disallowing such related gain of Rs.3,21,04,491/- as taxed in preceding assessment years. Both parties very fairly take us to page 85 of the paper book wherein the above co-
ITA Nos. 2196 & 2395/Ahd/14 [Axis Bank Ltd. vs. ACIT] A.Y. 2009-10 - 5 -
ordinate bench has accepted assessee’s identical arguments qua former limb in preceding assessment year 2008-09 as under:
“17. Ground no. 3 relates to the securitization gains of Rs. 3,16,64,200/- amortised as per RBI guidelines and non-allowance of such realized gains of Rs. 86,29,309/-.
The A.O. has considered this issue at Para 6 on page 5 of its order and has followed the findings given in the immediate preceding assessment year 2007- 08.
We find that in earlier assessment year, this dispute travelled up to the Tribunal and the Tribunal has considered the same in ITA Nos. 1015 & 1219/Ahd/2011 and 250/Ahd/2012. The relevant findings of the Co-ordinate Bench reads as under:- 24. Ground no. 3 relates to the addition made towards Gain on securitization amortized as per RBI guidelines. 25. The A.O has considered this issue at para 7 on page 14 of his order wherein the Officer made the following observations:- 7.1 On perusal of the significant accounting policies to the financial statement, it is seen that the note on 'securitization1 (Para 4.4) reads as under: The bank enters into purchase/ sale of corporate and retail loans through direct assignment/ special purpose vehicle (SPV). In most case, post securitization, the bank continues to service the loans transferred to the assignee/ SPV. The bank also provides credit enhancement in the form of cash collaterals and/ or by subordination of cash flows to Senior Pass Through Certificate (PTC) holders. In respect of credit enhancements provided or recourse obligations (projected delinquencies, future servicing etc.) accepted by the Bank, appropriate provision/ disclosure is made at the time of sale in accordance with AS-29- provisions, contingent liabilities and contingent assets. Gains on securitization transaction is recognized over the period of the underlying securities issued by the SPV. Loss on securitization is immediately debited to Profit and Loss Account. 7.2.Further, it is seen that 'Notes to account' (Para 5.1.15) reads as under:-
31.03.07 (Rs in Cr.)
Number of loan accounts securitized 2.00
Book value of loan assets securitized 547.16
Sale consideration received for the securities assets 550.09
Net gain/ loss over net book value 2.93
7.3 The assessee was asked to explain where the above amount of Rs. 2.93 crores has been offered as income in its annual accounts. In this regard, the assessee contended as under:
ITA Nos. 2196 & 2395/Ahd/14 [Axis Bank Ltd. vs. ACIT] A.Y. 2009-10 - 6 -
GAIN ON SECURITIZATION OF ASSET OF RS. 2.93 CRORES AS PER PARA 5.1.15 OF THE AUDITED ACCOUNTS During the hearing held on 10.11.2009, you have requested us to provide explanation that where the net gain of Rs. 2.93 on securitization transactions, as per para 5.1.15 (Page No. 60 of the annual report), has been accounted in the Profit and Loss. In this regard we submit as follows: For the year under consideration, the Bank has recognized income of Rs. 2,00,28,097 under the head Other Income, (Schedule 14, sub-clause, VII, miscellaneous income) and Rs. 93,13,051 was shown under the head other liabilities and provisions (Schedule 5, sub clause VII, others including provisions). The method of accounting followed in this regard is as per the RBI guidelines. In terms of the RBI Notification, a copy of which is enclosed for your reference, any loss arising on account of the sale pursuant to securitization proposal should be accounted and charged to the Profit and Loss account for the year during which the sale upon secularization is effected and any profit/premium arising on account of such sale should be amortized over the life of the securities issued or to be issued by the SPV (special purpose vehicle). As per the RBI directives, (Please refer Significant Accounting Policies at Para 4.4 under the head 'Securitisation1, on Page No. 51 of the annual report), gain on securitization is recognized over the period of the underlying securities issued by the SPV and loss on securitization is debited to Profit and Loss account. 26. The explanation of the assessee did not find favour with the A.O. who went on to make an addition of Rs. 93,13,051/-. Assessee carried the matter before the ld. CIT(A) and reiterated what has been stated during the course of assessment proceedings. It was strongly contended that what is relevant for Income Tax is real income. It was further brought to the notice of the First Appellate Authority that RBI guidelines are expressly made mandatory for all banks. After considering the facts and the submissions, the ld. CIT(A) was of the opinion since the assessee has sold these impugned assets, therefore, the assessee has no liability whatsoever on these transactions afterwards. Since there is no uncertainty to the income on these transactions there is no question of postponing the income. The ld. CIT(A) confirmed the addition made by the A.O. Before us, the ld. counsel for the assessee once again stated that being a bank it has to mandatorily follow the guidelines issued by the RBI. It is the say of the ld. counsel that it is not the case of the revenue authorities that the assessee has not followed the guidelines of the RBI. Therefore, the action of the A.O and also of the ld. CIT(A) are against the facts of the case. Per contra, the ld. D.R. strongly relied upon the order of the revenue authorities. 27. Having heard the rival submissions, we have carefully considered the orders of the authorities below. It is a settled proposition of law that what is relevant for Income Tax on the basis is the real income as held by the Hon’ble Supreme Court in the case of Godhra Electricity Co. Ltd. 225 ITR 746. Various High Courts have given due recognition to RBI guidelines which determined the taxation of banks/NBFC. The Hon’ble Uttaranchal High Court in the case of Nainital Bank Ltd. 309 ITR 335, Hon’ble Allahabad High Court in the case of Kailash Auto Finance Ltd. 320 ITR 394 and also Hon’ble High Court of Delhi in the case of Elgi Finance Ltd. 293 ITR 357. 28. In our considered opinion, the amortization merely represents a timing difference and since the bank is consistently making profits and paying tax at the highest rate without claiming any tax holiday benefit, it can be safely concluded that the method followed is revenue neutral. We draw support from the decision of the Hon’ble High Court of Bombay in the case of Nagri Mills Co. Ltd. 33 ITR 681. 29. Considering the facts in totality in the light of the judicial decisions referred to hereinabove, we do not find any merit in the findings of the ld. CIT(A). We
ITA Nos. 2196 & 2395/Ahd/14 [Axis Bank Ltd. vs. ACIT] A.Y. 2009-10 - 7 -
accordingly set aside the findings of the ld. CIT(A) and direct the A.O to delete the addition of Rs. 93.13 lacs. Ground no. 3 is accordingly allowed. 20. As no distinguishing decision has been brought to our notice, respectfully following the findings of the Co-ordinate Bench (supra), we direct the A.O. to delete the impugned disallowance/additions. Ground no. 3 is accordingly allowed.”
We draw support from above co-ordinate bench findings to delete addition of speculative gains of Rs.2,64,27,796/- amortized as per RBI guidelines. The assessee at this stage submits that it no more wishes to press for its latter grievance qua addition of Rs.3,21,05,491/- as an instance of double addition since assessed in earlier assessment years because of the fact that it has not been taxed till date. We appreciate this fair stand to confirm the above latter addition of Rs.3.21crores. This second substantive ground is therefore partly accepted.
We notice at this stage that the assessee has raised an additional ground on 08.09.2017 claiming employees’ stock option scheme “ESOP” as per SEBI guidelines, 1999 as revenue expenditure. It submits first of all that its significant accounting policies in annual report throw sufficient light on the impugned ESOP scheme 2001 in duly explaining that it has been following intrinsic value method in allocating stock option to employees. These options are stated to be granted at an exercise price equal or lower than fair market price of the underlying equity shares. The access of such fair market price over exercise price on grant date is claimed to be recognized as a deferred compensation cost as amortized on straightline basis over the vesting period of such options. Mr. Sonde then draws our attention to this tribunal’s special bench decision in Biocon Ltd. vs. DCIT (2013) 144 ITD 21(Bangalore)(SB) accepting difference between fair market value of shares on ESOP grant date and exercise of options’ day as business expenditure u/s.37(1) of the Act. He then clarifies that ESOP cost in the impugned assessment year is Rs.61.90crores. Relevant documents to this effect are stated to be forming part of assessee’s paperbook / 15th annual report pages 19, 21, 23, 67 and 85.
ITA Nos. 2196 & 2395/Ahd/14 [Axis Bank Ltd. vs. ACIT] A.Y. 2009-10 - 8 -
We afforded ample opportunity to the Revenue. It fails to rebut legality of assessee’s claim that above difference between fair market value of stock option on the date of allocation and exercise of option is admissible as revenue expenditure as per hon’ble special bench decision (supra). Its only case is that the assessee is not entitled to raise its additional ground at this belated stage. We find no merit in the instant technical plea. Hon’ble jurisdictional high court’s decision in CIT vs. Mitesh Impex 270 CTR 66 (Gujarat) recognizes this tribunal’s jurisdiction to entertain such an additional ground for the first time as under.
"38. It thus becomes clear that the decision of the Supreme Court in the case of Goetze (India) Ltd. vs. Commissioner of Income-tax (supra) is confined to the powers of the assessing officer and accepting a claim without revised return. This is what Supreme Court observed in the said judgment while distinguishing the judgment in the case of National Thermal Power Co. Ltd. vs. Commissioner of Income-tax (supra) and that is how various High Courts have viewed the dictum of the decision in the case of Goetze (India) Ltd. vs. Commissioner of Income-tax (supra). When it comes to the power of Appellate Commissioner or the Tribunal, the Courts have recognized their jurisdiction to entertain a new ground or a legal contention. A ground would have a reference to an argument touching a question of fact or a question of law or mixed question of law or facts. A legal contention would ordinarily be a pure question of law without raising any dispute about the facts. Not only such additional ground or contention, the Courts have also, as noted above, recognized the powers of the Appellate Commissioner and the Tribunal to entertain a new claim for the first time though not made before the assessing officer. Income Tax proceedings are not strictly speaking adversarial in nature and the intention of the Revenue would be to tax real income. 39. This is primarily on the premise that if a claim though available in law is not made either inadvertently or on account of erroneous belief of complex legal position, such claim cannot be shut out for all times to come, merely because it is raised for the first time before the appellate authority without resorting to revising the return before the assessing officer. 40. Therefore, any ground, legal contention or even a claim would be permissible to be raised for the first time before the appellate authority or the Tribunal when facts necessary to examine such ground, contention or claim are already on record. In such a case the situation would be akin to allowing a pure question of law to be raised at any stage of the proceedings. This is precisely what has happened in the present case. The Appellate Commissioner and the Tribunal did not need to nor did they travel beyond the materials already on record, in order to examine the claims of the assessees for deductions under section 80IB and 80HHC of the Act."
ITA Nos. 2196 & 2395/Ahd/14 [Axis Bank Ltd. vs. ACIT] A.Y. 2009-10 - 9 -
It is not in dispute that assessee’s relevant details pertaining to the impugned ESOP scheme already form part of the case records as indicated in preceding paragraph. It has further come on record that the whether or not such an ESOP expenditure is allowable u/s.37 of the Act or not was of course a debatable issue ultimately settled as per above special bench decision. We therefore find merit in assessee’s additional ground in principle. The same is therefore admitted. We accordingly direct the Assessing Officer to carry out necessary factual verification as per law after affording adequate opportunity of hearing to assessee. This third substantive ground is taken as accepted for statistical purposes. Assessee’s appeal ITA No.2196/Ahd/2014 partly succeeds.
We now advert to the Revenue’s appeal ITA No.2395/Ahd/2014 raising solitary substantive ground seeking to revive prior period expenditure disallowance of Rs.45,49,315/- made by the Assessing Officer qua annual technical fees paid to Infosys as deleted in lower appellate proceedings. There is no dispute that the assessee incurred the impugned expenditure in preceding assessment year between July 2007 to March 2008. It however claimed that the above expenditure stood crystallized only in relevant previous year as it received corresponding bills in said period only. The Assessing Officer termed the same as violation of matching concept and lack of evidence indicating crystallization of impugned expenditure in relevant previous year to invoke the disallowance in question. The CIT(A) in turn follows his findings in assessment year 2007-08 on identical issue in assessee’s favour.
We have given our thoughtful consideration to rival submissions. The Revenue fails to rebut the fact that the assessee has already succeeded on this prior period expenditure disallowance issue in preceding assessment years. We further find that hon’ble jurisdictional high court decision in Tax Appeal No. 566/2016 PCIT vs. Adani Enterprises holds that such a disallowance is not to be invoked in case an assessee is assessed at the same rate in the two assessment years in question. We therefore affirm the CIT(A)’s findings under challenge. The
ITA Nos. 2196 & 2395/Ahd/14 [Axis Bank Ltd. vs. ACIT] A.Y. 2009-10 - 10 -
Revenue’s sole substantive ground as well as main appeal ITA No.2395/Ahd/2014 fail.
The assessee’s appeal ITA No.2196/Ahd/2014 is partly allowed whereas Revenue’s appeal ITA No.2395/Ahd/2014 is dismissed.
[Pronounced in the open Court on this the 13th day of October, 2017.]
Sd/- Sd/- (N. K. BILLAIYA) (S. S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 13/10/2017